G20 subsidies to oil, gas and coal production: JapanAlex Doukas and Shakuntala Makhijani

priceofoil.orgodi.org

Country StudyNovember 2015

Argentina

Australia

Brazil

Canada

China

France

Germany

India

Indonesia

Italy

Japan

Korea (Republic of)

Mexico

Russia

Saudi Arabia

South Africa

Turkey

United Kingdom

United States

For the purposes of this country study, production subsidies for fossil fuels include: national subsidies, investment by state-owned enterprises, and public finance. A brief outline of the methodology can be found in this country summary. The full report provides a more detailed discussion of the methodology used for the country studies and sets out the technical and transparency issues linked to the identification of G20 subsidies to oil, gas and coal production.

The authors welcome feedback on both this country study and the full report to improve the accuracy and transparency of information on G20 government support to fossil fuel production.

This country study is a background paper for the report Empty promises: G20 subsidies to oil, gas and coal production by Oil Change International (OCI) and the Overseas Development Institute (ODI). It builds on research completed for an earlier report The fossil fuel bailout: G20 subsidies to oil, gas and coal exploration, published in 2014.

A Data Sheet with data sources and further information for Japan’s production subsidies is available at:http://www.odi.org/publications/10076-g20-subsidies-oil-gas-coal-production-japan

Background With scarce and rapidly dwindling fossil fuel resources of its own, Japan engages in only a small amount of domestic oil and gas exploration. It relies heavily on fossil fuel imports to meet its energy needs, particularly since the accelerated phase-out of nuclear power following the Fukushima disaster in March 2011. The Japanese government is actively involved in promoting oil, gas and coal exploration and extraction overseas to secure energy resources. In 2014, Japan was the third largest net importer of oil, and is the world’s top importer of liquefied natural gas.

Before the Fukushima disaster, nuclear power accounted for about 30% of Japan’s electricity generation. Since then, Japan’s Nuclear Regulation Authority has required all nuclear power plants to shut down for maintenance and to undergo stress tests to evaluate their capacity to withstand conditions such as earthquakes and attacks before reopening. In 2013, fossil fuels accounted for 86% of electricity generated – this was split between natural gas (43%), oil (14%) and coal (30%); hydro contributed 8%, and nuclear power was down to marginal levels. Renewables apart from hydroelectricity accounted for just under 4% of Japan’s electricity generation (EIA, 2015).

In June 2015, the Japanese government proposed rules to block the domestic construction of new but energy-inefficient coal power plants, but will continue to allow relatively more efficient (including ultra-supercritical) coal plants to be built (Obayashi, 2015). However, the current regulations only apply to coal plants above a certain size, meaning that about one third of the 45 new coal power plants currently proposed will not be subject to the efficiency requirements (Watanbe, 2015).

In terms of sector organisation, Japan’s upstream fossil fuel production is mainly led by the private sector. The state-owned Japan Oil, Gas and Metals National Corporation (JOGMEC) however plays a key role in providing financial and knowledge support to Japanese oil and gas producers working both in Japan and in waters offshore, as well as abroad. Japex and Inpex spend the most on oil and gas exploration activities in and near Japan. Downstream, Japan’s electricity generation sector is dominated by 10 privately owned integrated power companies that function as regional monopolies (EIA, 2015), but deregulation and unbundling of the sector is slated for 2016. Conversely, the private sector dominates the downstream oil and gas segment, with JX Nippon Oil & Energy, TonenGeneral and Idemitsu each operating refineries with more than 500,000 barrels per day of capacity in Japan.

National subsidiesJapan provides major national subsidies to promote oil and gas production by Japanese companies overseas and, to a smaller extent, domestically. These subsidies currently total $736 million (Table 1) (OECD, 2015).

Based on the desk research conducted for this analysis, there is relatively little detail available on the nature of Japan’s national subsidies for fossil fuel production beyond the OECD’s latest estimates of fossil fuel subsidies (OECD, 2015).

Much of Japan’s subsidies focus on exploration for new fossil fuel reserves. Japan’s largest single subsidy to fossil fuel production is the supply of risk capital to JOGMEC, which supports the acquisition of natural gas rights, with the aim of diversifying Japan’s supplies of natural gas. This subsidy is valued at $458 million per year, but is not included in the national subsidies total, to avoid double-counting. Instead, many of JOGMEC’s investments in new natural gas rights and production assets are captured in the ‘Public finance’ section below.

Due to Japan’s limited fossil fuel resource base, much of the remaining national subsidies for fossil fuel production are targeted towards oil refining. These include the subsidy for oil refining technology programmes ($118 million annually) and the oil refining rationalisation subsidy ($148 million annually), both of which provided support for research and development of advanced oil refining technologies (OECD, 2015).

The Japanese government provides additional support for oil refining and marketing in the form of the subsidy for structural reform measures ($104 million annually), which provides assistance to oil distributors for business diversification, as well as the oil product quality assurance subsidy ($16 million annually) (OECD, 2015).

The Japanese government funds the large-scale oil disaster prevention subsidy ($8 million annually), which provides upstream producers with oil fences to contain potential oil spills (OECD, 2015).

Japan’s New Energy and Industrial Technology Development Organization also has a budget of ¥6.8 billion. It is not quantified in this analysis because the timeline for the expenditure is unclear; as a result, a US dollar figure is not provided because the timeline on which to base a currency conversion is not clear.

The Japanese government also recently phased out a subsidy to promote domestic natural gas exploration activities; this subsidy was completely phased out by 2011 (OECD, 2015).

2 G20 subsidies to oil, gas and coal production

State-owned enterprise investmentFor fossil fuel production in Japan, in both upstream and downstream segments, most major actors are private sector companies. The notable exception is JOGMEC, a state-owned enterprise that conducts geological surveys and exploratory oil and gas drilling both in Japan and overseas, and provides this data to Japanese exploration and production companies. JOGMEC also provides technical support and develops new exploration technologies to assist companies in their exploration activities (JOGMEC, 2013).

JOGMEC’s activities are described further in estimates of public finance.

Public financeThrough financing by JOGMEC, the Japan Bank for International Cooperation (JBIC), Nippon Export and Investment Insurance (NEXI), the Japan Bank for International Cooperation (JICA), and the Development Bank of Japan (DBJ), Japan provided $38 billion in public finance for fossil fuel production from 2013 to 2014 – an annual average of $19 billion. The vast majority of this finance was for international projects, but JBIC also provided a smaller amount – $703 million – for domestic fossil fuel production within Japan over the same two-year period, with an annual average of $351 million (see Table 2).

JBIC is by far Japan’s largest provider of public finance for fossil fuel production, averaging $11.3 billion per year, with $1.3 billion of that directed towards coal, and $9.9 billion towards oil and gas.

Japan’s export credit agency, NEXI, provided an average of $4.5 billion per year to fossil fuel production. While this is less than JBIC’s total finance, NEXI financed a similar amount of coal to JBIC, averaging $1 billion per year.

JOGMEC, JICA and DBJ also provided public finance to fossil fuel production, but at volumes far lower than JBIC and NEXI.

To avoid double-counting, JOGMEC’s public finance is included in the total here, but capital injections from government and JOGMEC’s capital expenditures are not counted in the sections on national subsidies or state-owned enterprises.

Japan also contributed an annual average of $440 million to fossil fuel projects in 2013 and 2014 through its shares in the African Development Bank, the Asian Development Bank, the Inter-American Development Bank, the European Bank for Reconstruction and Development, and the World Bank Group, which range from 4.2% to 12.8% depending on the institution.

Japan 3

Table 1: Japan’s national subsidies to fossil fuel production, 2013–2014 ($ million except where stated otherwise)

Subsidy Subsidy type Targeted energy source

Stage 2013 estimate 2014 estimate Estimated annual average amount

Commission expenses for basic survey of domestic oil and natural gas resources

Direct spending Oil Extraction 168 168 168

Oil refining rationalisation subsidy Direct spending Oil Refining 148 148 148

Subsidy for oil refining technology programmes

Direct spending Oil Refining 118 118 118

Subsidy for structural reform measures Direct spending Oil Distribution (refining and marketing)

104 104 104

Methane hydrate development programme Direct spending Gas Extraction 86 86 86

Other national subsidies (in Data Sheets) 113 113 113

Totals

Total national subsidies ($ m) 736

Total national subsidies (JPY m) 74,717

Sources and additional data are available in the Data Sheets that accompany each Country Study.

Private companiesPrivate upstream oil and gas companiesJapan’s relatively small oil and gas industry is completely dominated by private sector Japanese companies, which control virtually all of the country’s limited production, reserves base and exploration expenditure. These companies, led by Inpex and Japex, are therefore likely to be the

major beneficiaries of government support, in addition to benefiting from the Japanese government’s financing of exploration projects overseas. Japex, spun out of the national oil company, is now 34% government-owned, but non-government shareholders own the majority of shares.

Table 3 displays these figures for the active oil and gas producers in Japan in 2014.

4 G20 subsidies to oil, gas and coal production

Table 2: Japan’s public finance for fossil fuel production, 2013–2014 ($ million except where stated otherwise)

Institution name Coal mining

Coal-fired power

Upstream oil and gas

Oil and gas pipelines, power plants and

refineries

Total fossil fuel finance 2013 &

2014

Annual avg. fossil fuel

finance

Domestic

Japan Bank for International Cooperation - 106 369 - 475 237

Development Bank of Japan -   - -  228 228 114

Subtotal domestic - 106 369 228 703 351

International

Japan Bank for International Cooperation 350 2,085 10,280 9,440 22,155 11,077

Nippon Export and Investment Insurance - 2,061 1,296 5,732 9,089 4,544

Japan Oil Gas and Metals National Corporation

7 - 3,087 - 3,094 1,547

Japan International Cooperation Agency - 1,064 - 814 1,878 939

Development Bank of Japan -  -  111 150 261 131

Multilateral development bank share 1 169 177 532 879 440

Subtotal international 358 5,378 14,951 16,667 37,355 18,678

Totals            

Total public finance ($ m) 19,029

Total public finance (JPY m) 2,013,444

Sources and additional data are available in the Data Sheets that accompany each Country Study.

Table 3: Top private upstream oil and gas producers in Japan, 2013–2014

Company Headquarter country

Oil production (million barrels in country)

Gas production (billion cubic

metres in country)

Sum of operating expenditure & capital expenditure, including

exploration expenditure ($ million)

Profitability (from country operations, as measured

by free cash flow) ($ million)

2013 2014 2013 2014 2013 2014 2013 2014

Japex Japan 2.1 1.7 1.1 1.0 217 243 198 134

Inpex Japan 2.0 1.5 1.2 0.8 204 188 270 127

Mitsubishi Corp Japan <1 <1 <1 <1 6 6 5 3

JX Nippon Oil and Gas Japan <1 <1 <1 <1 10 4 -4 3

Source: Rystad Energy, 2015.

At the start of 2014, Japan had 105 million barrels of oil equivalent (mboe) in oil and gas reserves. Japex and Inpex held 80% of these reserves.

Private midstream/downstream oil and gas companiesThe national industry group for oil refiners and distributors in Japan, the Petroleum Association of Japan (PAJ), provides data on oil refinery capacity (Table 4) (PAJ, 2015; Showa Shell Sekiyu, 2015). The companies with the largest refining capacities are JX Nippon Oil & Energy, TonenGeneral, Idemitsu, Cosmo, and Showa Shell, with Idemitsu set to become the second largest by refining capacity by 2016 if a planned merger with Showa Shell Sekiyu proceeds as planned (Nikkei Asian Review, 2015).

Private coal companiesThere are no active coal mines in Japan.

Private electricity companies (fossil fuel-based)Japan’s electricity production is dominated by 10 regional monopolies, represented by the Federation of Electric Power Companies of Japan (FEPC), a national industry organisation. The Japanese electricity market is currently preparing for deregulation, which will go into effect in 2016 and will open the electricity market more fully to other power producers (Matsuo, 2015).

Table 5 displays the fossil fuel generation capacity owned by the major regional monopolies (FEPC, 2011). The FEPC

lists only facilities larger than 1,000 MW, so the actual fossil fuel capacity is even larger. With the shutdown of most of the country’s nuclear power capacity following the 2011 Fukushima disaster, fossil fuels account for a larger share of these companies’ power production portfolios than before, and new fossil fuel (including coal) power plants are currently being planned.

Japan 5

Table 4: Top private companies operating in Japan’s downstream oil and gas sectors

Company Refining capacity (barrels per day)

JX Nippon Oil & Energy 1,310,700

TonenGeneral 698,000

Idemitsu 535,000

Cosmo 452,000

Showa Shell 445,000

Fuji 143,000

Taiyo 118,000

OIREC 115,000

Nansei 100,000

Toa 70,000

Source: PAJ, 2015

Table 5: Private operators in Japan’s electricity sector

Company Coal capacity (MW)

Oil capacity (MW)

Natural gas capacity (MW)

Total fossil fuel capacity (MW)

Tokyo 1,000 18,449 19,196 38,645

Chubu 4,100 8,181 10,813 23,094

Kansai 1,800 7,425 6,892 16,117

Tohoku 3,200 1,300 4,810 9,310

EPDC 7,600 - - 7,600

Kyushu 1,400 2,000 4,095 7,495

Chugoku 2,000 1,200 1,400 4,600

Hokuriku 2,400 1,500 - 3,900

Shikoku - 2,395 - 2,395

Hokkaido 1,650 - - 1,650

Total capacity from large fossil fuel power plants 25,150 42,450 47,206 114,806

Source: FEPC, 2011. Data as of 2011.

6 G20 subsidies to oil, gas and coal production

Methodology (for detailed methodology see Chapter 3 of main report)

This report compiles publicly available information on G20 subsidies to oil, gas and coal production across G20 countries in 2013 and 2014. It provides a baseline to track progress on the phase-out of such subsidies as part of a wider global energy transition. It uses the following terms and their definitions.

Production subsidiesGovernment support for fossil fuel production. For the purpose of this country study, production subsidies include national subsidies, investment by state-owned enterprises (SOEs) (domestic and international) and public finance (domestic and international) specifically for fossil fuel production.

Fossil fuel productionProduction in the oil, gas and coal sectors. This includes access, exploration and appraisal, development, extraction, preparation, transport, plant construction and operation, distribution and decommissioning. Although subsidies for the consumption of fossil fuels can support their production, this report excludes such subsidies as well as subsidies for the consumption of fossil fuel-based electricity.

National subsidiesDirect spending, tax and duty exemptions and other mechanisms (such as forms of capacity markets) provided by national and sub-national governments to support fossil fuel production. Normally, the value assigned for a national subsidy is the number provided by the government’s own sources, by the OECD, or by an independent research institution.

State-owned enterprise (SOE) investmentA SOE is a legal entity created by a government to undertake commercial activities on its behalf. SOEs can be wholly or partially owned by governments.

It is difficult to identify the specific component of SOE investment that constitutes a subsidy, given the limited publicly available information on government transfers to SOEs (and vice-versa), and on the distribution of investment within their vertically integrated structures. Therefore, this report provides data on total investment by SOEs in fossil fuel production (where this information is available from the company), which are presented separately from national subsidies.

For the purpose of this report, 100% of the support provided to fossil fuel production through domestic and international investment by an SOE is considered when a government holds >50% of the shares.

Public finance Public finance includes the provision of grants, equity, loans, guarantees and insurance by majority government-owned financial institutions for domestic and international fossil fuel production. Public finance is provided through institutions such as national and multilateral development banks, export credit agencies and domestic banks that are majority state-owned.

The transparency of investment data for public finance institutions varies. Assessing the portion of total financing that constitutes a subsidy requires detailed information on the financing terms, the portion of finance that is based directly on public resources (rather than raised on capital markets) or that depends on the institutions’ government-linked credit rating. Few of the institutions assessed allow public access to this information. Therefore, we report the total value of public finance from majority government-owned financial institutions for fossil fuel production separately from ‘national subsidy’ estimates.

For the purpose of this report, 100% of the support provided to fossil fuel production through domestic and international financing is considered when a government holds >50% of the shares in the bank or financial institution.

Japan 7

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